Here are the facts of the economic case as I see them today:
- Much of Europe is in recession and the downturn is in no small part a function of austerity measures that, like bloodletting, are making things worse, not better. While the new French president is certainly making the right sounds, it's awfully hard to point to the actual implementation of helpful policy anywhere.
- The U.S. is doing better but we too are failing to enact measures that would finally release the economy from the residual gravitational pull of the Great Recession.
- The latter point is showing up in lots of worrisome places: the economy is slogging along at too slow a growth rate (around 2%); the job market may be decelerating from an okay pace to a sub-par pace; real paychecks are falling behind inflation.
All of which begs the question, why are advanced economies so seemingly immune to correct diagnosis and prescription? Why are we applying leeches instead of the contemporary medicine of combined monetary and fiscal stimulus in order to once and for all hit the escape velocity that's eluded us thus far?
Here are some answers off the top of my head:
- U.S. Politics: There are those who so badly want to hammer the incumbent president that they're willing to throw the economy under the bus to do so. A potentially interesting wrinkle from Europe is, what if the electorate turns on the austerians?
- Stimulus Doesn't Work: There are also those who know two things: we implemented aggressive measures by the government and the Federal Reserve starting in 2009 and here we are, still hurting, in 2012. Ergo, stimulus doesn't work.
The counter-argument that things would have been a lot worse without those measures, while true, is a very heavy lift. Worse, adherents to this view then take it to the next level: if spending more doesn't work, then spending less surely will. They've convinced themselves that austerity will lead to growth, and though evidence to the contrary grows by the day, they're unmoved by it.
- Vested Interests: Obviously related to the first point above regarding politics, but here you've got wealthy people paying for the think tank research and politicians that will prevent progressive policies, including Keynesian stimulus other than high-end tax cuts. But this too can be a bit of a riddle: it's not obvious how opposing growth right now helps anyone. It used to be -- as recently as GW Bush -- you could count on Republicans to at least temporarily become Keynesian in recessions.
- Disdain for Government: Another reason we're stuck where we are is because too many people, including many in positions of power, simply disdain government's role in an economy they view as exclusively private. These are the "government doesn't create jobs" crowd, though I'm not sure what you do with the 22 million people who work for government, the millions more private-sector jobs that at least partially depend on government spending (e.g., contractors), and the fact that a consistent drag on our current economy is the loss of state and local jobs.
(I should note here that a plank in President Hollande's platform is the hiring of 60,000 more teachers.)
I know... there's Solyndra and the crazy GSA party in Vegas. The latter in particular is inexcusable (regarding the former, as carefully as you plan, some government loans will default -- that's no reason to give up on helping clean energy overcome some of the initial market barriers it faces). But these are tiny examples of things that went wrong*, compared to a ton of evidence that goes the other way, not the least of which regards the Recovery Act itself and the auto rescue, which together helped preserve millions of jobs.
- Nervousness Regarding Debt Levels: If you're already convinced that government spending doesn't work, you're going to view doing more of it as simply raising the debt. What's so unusual about this moment, however, is that given the slack in the economy and the fact that borrowing costs to the government are ridiculously low, the opposite is operative: by strangling growth right now, we're lowering GDP and diminishing our tax base. I don't want to push this too far: stimulus won't pay for itself. But even a cold-hearted cost benefit analysis -- one that took account of the waste engendered by such high joblessness -- would reject austerity measures right now.
I'm sure this list isn't exhaustive. Why do you think we're stuck in the slog?
This post originally appeared at Jared Bernstein's On The Economy blog.